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Beyond Macro-Prudential Regulation: Three Ways of Thinking About Financial Crisis, Regulation and Reform

This paper considers the debate about the "macro-prudential regulation" of finance in the context of a broader view of the relation of finance to the real economy. Five ideas are central to the argument. The first idea is that the two dominant families of ideas about finance and its regulation share a failure of institutional imagination. Neoclassical economists blame localized market and regulatory failures for the troubles of finance. Keynesians invoke the way in which the money economy may amplify cycles of despondency and euphoria. Neither current of thought recognizes that the institutions of finance in particular, and of the market economy in general, can take different forms, with different consequences for the organization of production and exchange as well as for distribution. The second idea is that, under present arrangements, finance readily becomes the master rather than the servant of the real economy and lays itself open to recurrent booms and busts. The third idea is that present arrangements can be reformed in ways that more effectively put finance at the service of the productive agenda of society. The fourth idea is that the regulation of finance, including what we now call macro-prudential regulation, can and should be designed as initial moves in such an institutional reshaping. The fifth idea is that neoclassical and Keynesian conceptions are inadequate guides to the execution of this task. We can find in law and legal thought many of the intellectual and practical tools that we need.